MANAGERIAL
ECONOMICS OF
NON-PROFIT
ORGANIZATIONS
Prof: Marc Jegers
Pauline Delphine Verhelst
VUB | 2020-2021
,Table of contents
Introduction ...................................................................................................................................................................... 2
Part 1: Definitions.............................................................................................................................................................. 4
1. Defining non-profit organizations ............................................................................................................................... 4
1.1. The provision of goods and services................................................................................................................. 4
1.2. Definition .......................................................................................................................................................... 5
1.3. Organizational objectives ................................................................................................................................. 5
1.4. Incentive implications: the property rights approach ...................................................................................... 6
1.5. Classifying non-profit organizations ................................................................................................................. 6
Part 2: The economic rationale of non-profit organizations and its implications on their functioning................................. 8
1. The demand for non-profit organizations ................................................................................................................... 8
1.1. Institutional choice ........................................................................................................................................... 8
1.2. The transaction cost approach ......................................................................................................................... 8
1.3. Non-profit organizations versus profit organizations ....................................................................................... 9
1.4. Non-profit organizations vs governments ...................................................................................................... 13
1.5. Where do we stand? ...................................................................................................................................... 14
2. Founding a non-profit organization .......................................................................................................................... 15
2.1. Non-profit entrepreneurs ............................................................................................................................... 15
2.2. Modelled non-profit entrepreneurship .......................................................................................................... 15
2.3. Organizational survival ................................................................................................................................... 17
3. Governing and staffing a non-profit organization .................................................................................................... 19
3.1. The principal-agent framework and non-profit organizations ....................................................................... 19
3.2. Principals in a non-profit organization ........................................................................................................... 20
3.3. Agents in a non-profit organization ................................................................................................................ 24
3.4. What about volunteers? ................................................................................................................................. 32
Part 3: The economics of non-profit management ........................................................................................................... 33
1. Organizational strategy and behavior of non-profit organizations .......................................................................... 33
1.1. Strategic planning in non-profit organizations ............................................................................................... 33
1.2. Strategic choices ............................................................................................................................................. 34
1.3. Comparing strategic behavior of non-profit organizations and profit organizations ..................................... 36
1.4. Comparing strategic behavior of non-profit organizations and public providers........................................... 41
2. Marketing in non-profit organizations ...................................................................................................................... 42
2.1. Marketing management ................................................................................................................................. 42
2.2. Pricing ............................................................................................................................................................. 42
2.3. Volunteers ...................................................................................................................................................... 43
2.4. Subsidies and gifts .......................................................................................................................................... 47
2.5. Profit activities by non-profit organizations ................................................................................................... 59
3. Accounting in non-profit organizations ..................................................................................................................... 63
3.1. Principles of accounting and control .............................................................................................................. 63
3.2. How are accounting and control perceived? .................................................................................................. 64
3.3. Accounting theory for non-profit organizations ............................................................................................. 64
3.4. Financial statements of non-profit organizations .......................................................................................... 76
3.5. Cost accounting in non-profit organizations .................................................................................................. 76
4. Financial management of non-profit organizations.................................................................................................. 80
4.1. Sources of funds ............................................................................................................................................. 80
4.2. Cost of capital ................................................................................................................................................. 84
4.3. Capital structure ............................................................................................................................................. 85
4.4. Financial vulnerability ..................................................................................................................................... 87
Conclusion ....................................................................................................................................................................... 88
1
,Introduction
- Focus = economics of non-profit organizations’ management
o Important when it comes to maximizing the organization’s social and
economic impact
- Economic foundations of non-profit organizations are often ignored or neglected
- No generally accepted theoretical framework yet
- Part 1: definitions
An organization of which the founder or others are not entitled to (a part of) the
organization’s profits, a condition traditionally called the non-distribution constraint.
o Economics based definition from Hansmann
o Two crucial aspects
§ Organizational objectives
§ Incentive mechanics
- Part 2: the economic rationale of non-profit organizations and its implications on
their functioning
o 1. ‘Demand’ for non-profit organizations
§ Transaction cost theory
• Only institutions that minimize transaction costs can survive
§ Comparison to profit organizations
• Failures of the market
§ Mixed industries
o 2. ‘Simple’ organizations
§ Activities under control of the founder
§ Non-profit entrepreneur
o 3. More complex organizations
§ Principal-agent approach
§ Board is assumed to perform the principal’s role
• Composition and functioning of the board
§ Manager and non-managerial staff members
§ Attention to volunteers
- Part 3: the economics of non-profit management
o Functional managerial domains through the lens of non-profit organizations
§ Variant of the basic management model
§ Focus on the idiosyncrasies (eigenaardigheden) of non-profit
organisations
o 1. Strategic management
§ Strategic planning and choices
§ Predict differences in strategic responses to exogenous shocks
between non-profit organizations and profit organizations
§ Competition in mixed industries
§ Discussion of strategic differences between public providers and non-
profit organizations
2
, o 2. Marketing for non-profit organizations
§ Role of marketing management
§ Specific marketing domains
• Pricing
• Role of volunteers
• Subsidies and gifts
• Development of profit activities by non-profit organizations
o 3. Non-profit accounting and auditing
§ Principal-agent based theory
§ Problem of (the lack of) knowledge of board members
§ Specific cost accounting issues
§ Economic analyses of accounting choices
o 4. Non-profit financial management
§ Depart from the standard financial theory in a number of crucial
respects
- Exam
o 50% wright – wrong questions
§ +1/-1 correction
o 4 open questions
§ Concepts and proofs
- Abbreviations
o Npo = non-profit organizations
o Po = profit organizations
3
ECONOMICS OF
NON-PROFIT
ORGANIZATIONS
Prof: Marc Jegers
Pauline Delphine Verhelst
VUB | 2020-2021
,Table of contents
Introduction ...................................................................................................................................................................... 2
Part 1: Definitions.............................................................................................................................................................. 4
1. Defining non-profit organizations ............................................................................................................................... 4
1.1. The provision of goods and services................................................................................................................. 4
1.2. Definition .......................................................................................................................................................... 5
1.3. Organizational objectives ................................................................................................................................. 5
1.4. Incentive implications: the property rights approach ...................................................................................... 6
1.5. Classifying non-profit organizations ................................................................................................................. 6
Part 2: The economic rationale of non-profit organizations and its implications on their functioning................................. 8
1. The demand for non-profit organizations ................................................................................................................... 8
1.1. Institutional choice ........................................................................................................................................... 8
1.2. The transaction cost approach ......................................................................................................................... 8
1.3. Non-profit organizations versus profit organizations ....................................................................................... 9
1.4. Non-profit organizations vs governments ...................................................................................................... 13
1.5. Where do we stand? ...................................................................................................................................... 14
2. Founding a non-profit organization .......................................................................................................................... 15
2.1. Non-profit entrepreneurs ............................................................................................................................... 15
2.2. Modelled non-profit entrepreneurship .......................................................................................................... 15
2.3. Organizational survival ................................................................................................................................... 17
3. Governing and staffing a non-profit organization .................................................................................................... 19
3.1. The principal-agent framework and non-profit organizations ....................................................................... 19
3.2. Principals in a non-profit organization ........................................................................................................... 20
3.3. Agents in a non-profit organization ................................................................................................................ 24
3.4. What about volunteers? ................................................................................................................................. 32
Part 3: The economics of non-profit management ........................................................................................................... 33
1. Organizational strategy and behavior of non-profit organizations .......................................................................... 33
1.1. Strategic planning in non-profit organizations ............................................................................................... 33
1.2. Strategic choices ............................................................................................................................................. 34
1.3. Comparing strategic behavior of non-profit organizations and profit organizations ..................................... 36
1.4. Comparing strategic behavior of non-profit organizations and public providers........................................... 41
2. Marketing in non-profit organizations ...................................................................................................................... 42
2.1. Marketing management ................................................................................................................................. 42
2.2. Pricing ............................................................................................................................................................. 42
2.3. Volunteers ...................................................................................................................................................... 43
2.4. Subsidies and gifts .......................................................................................................................................... 47
2.5. Profit activities by non-profit organizations ................................................................................................... 59
3. Accounting in non-profit organizations ..................................................................................................................... 63
3.1. Principles of accounting and control .............................................................................................................. 63
3.2. How are accounting and control perceived? .................................................................................................. 64
3.3. Accounting theory for non-profit organizations ............................................................................................. 64
3.4. Financial statements of non-profit organizations .......................................................................................... 76
3.5. Cost accounting in non-profit organizations .................................................................................................. 76
4. Financial management of non-profit organizations.................................................................................................. 80
4.1. Sources of funds ............................................................................................................................................. 80
4.2. Cost of capital ................................................................................................................................................. 84
4.3. Capital structure ............................................................................................................................................. 85
4.4. Financial vulnerability ..................................................................................................................................... 87
Conclusion ....................................................................................................................................................................... 88
1
,Introduction
- Focus = economics of non-profit organizations’ management
o Important when it comes to maximizing the organization’s social and
economic impact
- Economic foundations of non-profit organizations are often ignored or neglected
- No generally accepted theoretical framework yet
- Part 1: definitions
An organization of which the founder or others are not entitled to (a part of) the
organization’s profits, a condition traditionally called the non-distribution constraint.
o Economics based definition from Hansmann
o Two crucial aspects
§ Organizational objectives
§ Incentive mechanics
- Part 2: the economic rationale of non-profit organizations and its implications on
their functioning
o 1. ‘Demand’ for non-profit organizations
§ Transaction cost theory
• Only institutions that minimize transaction costs can survive
§ Comparison to profit organizations
• Failures of the market
§ Mixed industries
o 2. ‘Simple’ organizations
§ Activities under control of the founder
§ Non-profit entrepreneur
o 3. More complex organizations
§ Principal-agent approach
§ Board is assumed to perform the principal’s role
• Composition and functioning of the board
§ Manager and non-managerial staff members
§ Attention to volunteers
- Part 3: the economics of non-profit management
o Functional managerial domains through the lens of non-profit organizations
§ Variant of the basic management model
§ Focus on the idiosyncrasies (eigenaardigheden) of non-profit
organisations
o 1. Strategic management
§ Strategic planning and choices
§ Predict differences in strategic responses to exogenous shocks
between non-profit organizations and profit organizations
§ Competition in mixed industries
§ Discussion of strategic differences between public providers and non-
profit organizations
2
, o 2. Marketing for non-profit organizations
§ Role of marketing management
§ Specific marketing domains
• Pricing
• Role of volunteers
• Subsidies and gifts
• Development of profit activities by non-profit organizations
o 3. Non-profit accounting and auditing
§ Principal-agent based theory
§ Problem of (the lack of) knowledge of board members
§ Specific cost accounting issues
§ Economic analyses of accounting choices
o 4. Non-profit financial management
§ Depart from the standard financial theory in a number of crucial
respects
- Exam
o 50% wright – wrong questions
§ +1/-1 correction
o 4 open questions
§ Concepts and proofs
- Abbreviations
o Npo = non-profit organizations
o Po = profit organizations
3
